Attack of the 50 Foot Blockchain
Page 2
So why bother with all of this? Ideology. From day one, Bitcoin was about pushing politics.
Chapter 2: The Bitcoin ideology
At first, almost everyone who got involved did so for philosophical reasons. We saw bitcoin as a great idea, as a way to separate money from the state.
– Roger Ver8
The Bitcoin ideology propagated through two propositions:
if you want to get rich for free, take on this weird ideology;
don’t worry if you don’t understand the ideology yet, just keep doing the things and you’ll get rich for free!
The promise of getting rich for free is enough to get people to take on the ideas that they’re told makes it all work. Bitcoin went heavily political very fast, and Bitcoin partisans promoted anarcho-capitalism (yes, those two words can in fact go together), with odd notions of how economics works or humans behave, from the start.
The roots of the Bitcoin ideology go back through libertarianism, anarcho-capitalism and Austrian economics to the “end the Fed” and “establishment elites” conspiracy theories of the John Birch Society and Eustace Mullins. The design of Bitcoin and the political tone of its early community make sense only in the context of the extremist ideas ancestral to the cyberlibertarian subculture it arose from.9 Most of Bitcoin’s problems as money are because it’s built on crank assumptions.
Libertarianism and cyberlibertarianism
Libertarianism is a simple idea: freedom is good and government is bad. The word “libertarian” originally meant communist and anarchist activists in 19th-century France. The American right-wing variant starts at fairly normal people who want less bureaucracy and regulation and consider lower taxes more important than social spending. The seriously ideological ones go rather further – e.g., anarcho-capitalism, the belief in the supremacy of property rights and the complete elimination of the state.
American-style libertarians abound on the Internet. Computer programmers are highly susceptible to the just world fallacy (that their economic good fortune is the product of virtue rather than circumstance) and the fallacy of transferable expertise (that being competent in one field means they’re competent in others). Silicon Valley has always been a cross of the hippie counterculture and Ayn Rand-based libertarianism (this cross being termed the “Californian ideology”).
“Cyberlibertarianism” is the academic term for the early Internet strain of this ideology. Technological expertise is presumed to trump all other forms of expertise, e.g., economics or finance, let alone softer sciences. “I don’t understand it, but it must be simple” is the order of the day.
The implicit promise of cyberlibertarianism was the dot-com era promise that you could make it big from a startup company’s Initial Public Offering: build something new and useful, suddenly get rich from it. The explicit promise of Bitcoin is that you can get in early and get rich – without even building an enterprise that’s useful to someone.
Pre-Bitcoin anonymous payment channels
Peer-to-peer electronic payment services existed before Bitcoin. PayPal was explicitly intended to be an anonymous regulation-dodging money transmission channel, with an anti-state ideology; in a 1999 motivational speech to employees, Peter Thiel rants how “it will be nearly impossible for corrupt governments to steal wealth from their people through their old means”10 – though they quickly realised that being part of the system made for a much more viable business.
e-Gold was a digital currency backed by gold, founded in 1996. It was perceived as anonymous but was actually pseudonymous, and the company made their records available to law enforcement. It was quite popular before being shut down in 2009 for not having obtained a money transmitter’s license in the previous several years.
Liberty Reserve in Costa Rica operated from 2006 to 2013. It was all about the anonymous money transmission, and founder Arthur Budovsky (who had previously been convicted for running a similar operation in the US) ended up jailed for 20 years for money laundering. Some Bitcoiners regarded Liberty Reserve as a predecessor to Bitcoin and worried at the possible precedent this might set.11
The prehistory of cryptocurrencies
Cryptographic money was first mooted by David Chaum in his 1982 paper “Blind Signatures for Untraceable Payments”12 and his 1985 paper “Security without Identification: Transaction Systems to Make Big Brother Obsolete.”13 Chaum founded DigiCash in 1990 to put his ideas into practice. It failed in the market, however, and closed in 1998.
Most concepts later used in Bitcoin originated on the Cypherpunks mailing list in the early 1990s. The ideology was libertarian right-wing anarchism, often explicitly labeled anarcho-capitalism; they considered government interference the gravest possible threat, and hoped to fight it off using the new cryptographic techniques invented in the 1970s and 1980s. They also tied into the Silicon Valley and Bay Area Extropian/transhumanist subculture. Tim May’s “Crypto Anarchist Manifesto,” a popular document on the list, is all about the promise of money and commerce with no government oversight, and anticipates many of the future promises and aspirations of cryptocurrency.14
Chaum’s DigiCash was not acceptable to the Cypherpunks, as a single company confirmed every participant’s signature. They wanted something that didn’t rely on a central authority in any way.
Adam Back proposed Hashcash to the list in 1997, money created by guessing the reversal of a cryptographic hash; Nick Szabo put forward Bitgold and Wei Dai b-money in 1998. These were all bare proposals, without working implementations.
“Cypherpunk” was a pun on “cyberpunk.” Cyberpunk science fiction of the 1980s never got much into pure bank-free cryptographic currencies; it mostly treated the idea of transmitting money digitally at all as being interesting enough for story purposes. (If William Gibson had thought of Bitcoin for his cyber-heist short “Burning Chrome,” it could have been set in the present day.) The Cypherpunks got very excited about Neal Stephenson’s 1999 novel Cryptonomicon, one plot thread of which involves a fictional sultanate promoting a cryptographic digital currency, even though the book example is issued by a government and backed by gold.
An anonymous person calling himself “Satoshi Nakamoto” started working on Bitcoin in 2007,15 as a completely trustless implementation of the b-money and Bitgold proposals16 (though Nakamoto wasn’t aware of Szabo’s work until quite late in the process).17 In 2008, he emailed Adam Back with some of his ideas, and six weeks later announced the Bitcoin white paper on the Cryptography and Cryptography Policy mailing list, a successor to the Cypherpunks list. It was, at last, a proposal with a plausible decentralisation mechanism, soon followed by actual working code that people could try. Nakamoto and list contributor Hal Finney tested the software in November and December 2008, and Bitcoin 0.1 was released in January 2009.
The conspiracy theory economics of Bitcoin
The gold standard – an economy with a finite money supply – was accepted mainstream monetary policy up to the early 20th century, when the debts from World War I made it infeasible. Even the winners in World War I tried to back all the paper (that the economy had actually run on since the late 1600s) with gold until the 1930s. But they suffered manic booms and devastating busts, over and over, because there was too much economic activity for the gold on hand.
It took until the Great Depression for governments to accept that managing the money supply – injecting money every now and then, managing interest rates, requiring banks to be backed – was not optional, and that they just couldn’t do that on gold. Countries recovered from the Great Depression pretty much as they left the rigid gold standard behind, because managing your money supply works much better and is much more stable. A version of the gold standard lingered in the form of the Bretton Woods system until 1971, but rigid backing of currency with gold had been delivered the fatal blow by World War I and then the Great Depression.
But a standard mode of pseudoscience is to adopt and fervently defend a discarded ide
a, and “gold bugs” were no exception, ardently pushing the version of the gold standard that had just been demonstrated utterly inadequate to a functioning economy.
(Gold bugs are frankly bizarre. There are lots of rarer metals than gold, but you never hear about “rhodium bugs” or “scandium bugs” or even “platinum bugs.”)
The John Birch Society is an American far-right fringe group that has long claimed that inflation comes from central bank increase of the money supply – in fact, they try to redefine “inflation” to mean this – for the purpose of stealing “value” from the people, and that this is why the gold standard was abolished and the Federal Reserve founded.18 Eustace Mullins furthered these ideas amongst conspiracy theorists with the 1993 reprint of his 1952 book Secrets of the Federal Reserve, in which he blames the Fed’s creation on “the Rothschild-controlled Bank of England.” (Mullins was also famous for his anti-Semitism; every time Mullins said “banker” he meant “Jew,” but this mostly isn’t consciously the case amongst Bitcoiners, who only occasionally rant about Zionists.)
These ideas had also been propagated in the mainstream by Ron Paul in the wake of the 2008 credit crunch and the quantitative easing (just printing money, to kick-start the economy) that followed. Though Paul isn’t a fan of Bitcoin – he wants a return to actual gold after he abolishes the Fed.19
Old ideologies come back when they fill a present desire and there’s an opening for them. So these claims, somewhere between incorrect and nonsensical, showed up full-blown in Bitcoin discussion, proponents straight-facedly repeating earlier conspiracy theories as if this was all actually proper economics. Because if it is, then maybe they’ll get rich for free!
In this context, and particularly in Bitcoin discourse, you’ll see many words that look like English but are actually specialised conspiracy theory jargon. “Liberty” means only freedom from government; “tyranny” means only government; “force” and “violence” mean only government force and violence; “open societies” is a code word for “free market without regulations”; “freedom” means “free market without regulations” and only that.
Pure commodities – gold and silver – haven’t done the job of money well for a few hundred years, and Bitcoin wants to be money but was set up to work like a commodity. Nakamoto put a strict limit on the supply of bitcoins: there will only ever be 21 million BTC. So advocates claim Bitcoin is thus, somehow, sufficiently similar to gold to serve as a “store of value” in the desired manner, even “an Internet of true value” (whatever “true” means there). This is despite its extreme volatility making it almost useless as a store of value, and despite it being way harder to use as money than any currency should be, even for its few use cases.
Bitcoin ideology bought into the entire Federal Reserve conspiracy package. The Fed is a plot to use inflation to steal value from the people and hand it to a shadowy cabal of elites who also control the government; the worldwide economy is in danger of collapse at any moment due to central banking and fractional reserve banking; gold – sorry, Bitcoin – has intrinsic value that will protect you from this collapse. Advocates repackage and propagate these ideas almost verbatim, even when they almost certainly don’t know who or where they trace back to.
Conventional economics views inflation – a decline in money’s purchasing power – as a phenomenon of consumer prices, consumer confidence, productivity, commodity and asset prices, etc., which a central bank then responds to with monetary policy. Printing more money can cause inflation, but it’s not the usual cause. The conspiracy theorist view is that it’s the central bank intervention causing the inflation. Bitcoin ideology assumes that inflation is a purely monetary phenomenon that can only be caused by printing more money, and that Bitcoin is immune due to its strictly limited supply. This was demonstrated trivially false when the price of a bitcoin dropped from $1000 in late 2013 to $200 in early 2015 – 400% inflation – while supply only went up 10%.
Nakamoto’s 2008 white paper alluded to these ideas, but the 2009 release announcement for Bitcoin 0.1 states them outright:20
The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.
Bitcoin failed at every one of Nakamoto’s aspirations here. The price is ridiculously volatile and has had multiple bubbles; the unregulated exchanges (with no central bank backing) front-run their customers, paint the tape to manipulate the price, and are hacked or just steal their users’ funds; and transaction fees and the unreliability of transactions make micropayments completely unfeasible. Because all of this is based in crank ideas that don’t work.
A week after Bitcoin 0.1 was released, Jonathan Thornburg wrote on the Cryptography and Cryptography Policy mailing list: “To me, this means that no major government is likely to allow Bitcoin in its present form to operate on a large scale.”21 In practice, governments totally did, and treated it like any other financial innovation: give it room to run, make it very clear that regulation still applies, give it a bit more room to run, repeat. The advocates’ ideas of how governments work were already at odds with completely predictable reality.
(I’m still baffled at the notion that the governments of first-world countries are somehow fundamentally against the idea of people doing well with innovations in finance.)
Austrian economics
The acceptable face of this conspiracy cluster is Austrian economics, first put together in its present form by Ludwig von Mises (hence “Austrian”). Its key technique is praxeology, in which economic predictions are made entirely by extrapolating from fundamental axioms. It explicitly repudiates any sort of empirical testing of predictions, and holds that you can’t predict future behaviour from past behaviour even in principle, so testing your claims is meaningless:22
The subject matter of all historical sciences is the past. They cannot teach us anything which would be valid for all human actions, that is, for the future too …
No laboratory experiments can be performed with regard to human action. We are never in a position to observe the change in one element only, all other conditions of the event remaining unchanged. Historical experience as an experience of complex phenomena does not provide us with facts in the sense in which the natural sciences employ this term to signify isolated events tested in experiments. The information conveyed by historical experience cannot be used as building material for the construction of theories and the prediction of future events …
[Praxeology’s] statements and propositions are not derived from experience. They are, like those of logic and mathematics, a priori. They are not subject to verification or falsification on the ground of experience and facts.
Despite this, proponents keep making predictions and claims, and insisting they are, somehow, still worth listening to and applying to the world.
Austrian economics was heavily promoted by heterodox23 economist Murray Rothbard, founder of the Ludwig von Mises Institute. Rothbard invented the term anarcho-capitalism for his ideology that a complete absence of government is essential, and that property rights, which are paramount, will somehow still function without it. An offence against one’s property is equivalent to an offence against the self; so the “Non-Aggression Principle” holds that trespassing is aggression, but the owner shooting you for trespassing somehow isn’t. Police will be replaced with private security services and courts with arbitration services. Really extreme Austrians like Hans-Herman Hoppe admit that all this would lead directly to functional feudalism. Which becomes neoreaction and the alt-right, but Phil Sandifer already wrote that book.24 25
Sadly for Bitcoin, most Austrian economists aren’t fans – even as Bitcoiners remain huge fans of Austrian economics.27 You will find Austrian jargon in common use in the cryptocurrency world.
Proponents of Austrian economics include the fringe economics blog Zero Hedge, which has confidently predicted two hundred of the last two recessions. Zero Hedge covers Bitcoin extensively, and Bitcoiners are fans in turn.
Chapter 3: The incredible promises of Bitcoin!
Nobody buys a toothbrush on the basis that the toothbrush market will go to the moon! (There hasn’t so far been a toothbrush asset bubble.) This is, however, the standard selling point for cryptocurrencies. As is claiming the selling point is anything other than hope that it will go to the moon.
Advocates claim all manner of practical use cases for Bitcoin. A lot of the claims contradict each other, and indeed the actual software; others merely run aground on reality. They mix up hypothetical ideas (most of it) and what is robust technology that actually exists (almost none), with bogus economics to boot. Just as long as they can get you to buy Bitcoin.
After the first Bitcoin bubble popped, many of these claims were carried forward unaltered into contemporary business “Blockchain” hype.